Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

When Neubauer put the phone down, he looked up at the other board members.

“You’re not going to believe this. That was Hank.”

He didn’t need to explain to the directors why the call was so surreal. To many in the room, the Treasury secretary had just ordered them to merge with Goldman.

At Treasury, Jim Wilkinson, Paulson’s chief of staff, was by now practically sleepwalking down the halls. Paulson had just updated him on the Goldman-Wachovia talks and asked him for his counsel. Should the government provide assistance? Wilkinson, in his stupor, said he thought that it sounded like a reasonable idea.

But a half hour later, after a cup of coffee and further reflection, Wilkinson changed his mind. He realized that such a deal would be a public relations nightmare at the worst possible time, just as they were trying to pass TARP. Paulson would lose all credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.

Wilkinson ran back into Paulson’s office with Michele Davis.

“Hank, if you do this, you’ll get killed,” Wilkinson said frantically. “It would be fucking crazy.”

Ben Bernanke was being piped in over the Polycom speakerphone in Geithner’s conference room, where Jester and Norton from Treasury and Terry Checki, Meg McConnell, and William Dudley from the New York Fed were gathered around a conference table.

Warsh was reviewing the new terms of the Goldman-Wachovia agreement. Steel and Cohn had come back to him with a slight revision to the previous proposal, allowing for Goldman Sachs to take the first $1 billion of losses, per Warsh’s suggestion. Cohn and Steel said they were committed to completing the deal that afternoon if the government would agree to provide assistance. The boards of both companies had been put on standby.

The general view in the room seemed to be that it was a good transaction: It would give Goldman a stable deposit base at the same time it provided Wachovia with a powerful investment bank and top-notch management.

But Geithner was quick to point out its drawbacks. “Does it make Goldman look weaker than they are?” he asked—the same question that Blankfein had raised earlier in the day. Geithner also wondered whether the Fed should be the one loaning the money. Since Wachovia’s regulator was the FDIC, perhaps it ought to be the one to bear that burden.

Checki couldn’t believe the gall of Goldman’s request. “They’re still driving these negotiations as though they have leverage,” he said. But he opposed the merger for a different reason: He was concerned that neither side had enough time to make a thoughtful decision, referring to the situation as “the shotgun wedding syndrome.”

Bernanke listened to the debate without comment.

Then Bill Dudley, a former Goldman man himself who thought the deal was unattractive for the government, also raised the same objection that Buffett had raised just hours earlier: It would prove a public relations disaster for the government.

“What are we doing here? Look at all of the connections you’ve got: Treasury and Steel and me. Goldman is everywhere. We have to be careful.”

After Geithner and Bernanke called Paulson, all three agreed they just couldn’t support the deal.

When Warsh delivered the news to Steel and Cohn, both men were flabbergasted. They had spent the last twenty-four hours trying to formulate an agreement at the behest of the government and were now being told it could not be carried out.

“I’m sorry, I understand, I’m just as frustrated as you are, we just don’t have the money, we don’t have the authorization,” Warsh explained.

Steel, feeling particularly slighted, told Warsh that he felt as if he were running from one bride to another, trying to find the right marriage to save his firm. First Morgan Stanley, and now Goldman Sachs.

Cohn, realizing that the conversation was about to get testy, said, “I think I should step out.”

“No, you should listen to this,” Steel insisted, raising his voice for the first time. “You should sit here and listen to every goddamn word of this.”

Anxiously talking into the speakerphone in the center of the table, Steel became even more irate. “What do you want me to do? Tell me what to do. You can’t make this work, you don’t like this, you don’t like that. Do you want to do the Midtown deal?” he said, referring to Morgan Stanley. “Do you want me to call Citi? I’ve got to protect my shareholders. That’s my job. Just tell me what the fuck you want me to do, because I’m tired of running in circles.”

“I don’t know if it’s true, but we’re hearing Goldman is announcing a deal with Wachovia in the next twenty-four hours,” John Mack announced to the management team gathered in his office. He had just learned of the rumor from a director at the meeting with his board and was distressed by the possibility. After all, it had been only Friday that they were in merger negotiations that didn’t seem to be going anywhere.

Taubman, the firm’s head of investment banking, was horrified. How could Goldman Sachs, Morgan Stanley’s most bitter rival, be willing to take on all of Wachovia’s toxic assets? he thought to himself. Hasn’t Goldman seen the massive hole in Wachovia’s balance sheet? Then it dawned on him. “Those fuckers probably have a deal with the government!” he exclaimed to the group. “It makes no sense unless the government is bailing out Wachovia and taking back a bunch of bad assets!”

Paulson had gotten word that the Goldman-Wachovia deal was off, which put even more pressure on him to find a solution for Morgan Stanley. To him, JP Morgan was the obvious answer. While Jamie Dimon might have been resisting Paulson’s overtures—Paulson had pressed the case with him several times already over the past day—Paulson now needed to apply some serious pressure.

“Jamie,” Paulson said when he reached him, conferencing in Geithner and Bernanke. “I need you to really think about buying Morgan Stanley. It’s a great company with great assets.”

Dimon had just finished having an impromptu meeting with Gao of CIC, who had come to see him to explore whether JP Morgan would be willing to work together on a bid for Morgan Stanley, with CIC buying additional equity in the firm and JP Morgan providing a credit line. But the meeting hadn’t gone anywhere.

Dimon, who had been anticipating that the government might try to foist the deal on him, was adamant.

“You’ve got to stop. This is not doable,” he said intently. “It’s not possible. I would do anything for you and for this country, but not if it’s going to jeopardize JP Morgan.